Tariffs, Trade Wars & Trading – Focus on Metals & Manufacturing
December 13, 2018
It was 6.00 PM on a cold wintry afternoon in Lawrenceville, Illinois as Dave swung into the driveway of his suburban home. He reflected that there had never been a more volatile time to trade metals during his twenty-year long career. As was usual for his family at this time of the year, he was flying to Aspen tomorrow for a pre-Christmas ski holiday. What was different, was that by this time his supply contracts for steel for 2019 were all locked down with no fluctuations until manufacturing started in a few months.
Dave Hindstorm worked as a metals trader for a large car manufacturer in Lawrenceville, Illinois. Today, he paused nervously before entering his home looking at the lovely red and silver Christmas decorations in the window, unsure of what new “surprises” the holiday season would bring. Steel markets had swung nonstop for 12 months, starting with US tariffs in January to the latest US-China truce just a few days earlier.
In January 2018, the US imposed tariffs on solar panels and washing machines of 30 to 50 percent. Shortly after, the US imposed 25% tariffs on steel and 10% on aluminum from most countries. On June 1, 2018, this was extended on the European Union, Canada, and Mexico. The only countries which remained exempt from the steel and aluminum tariffs were Australia and Argentina. Separately, on July 6th this year, the US set a tariff of 25% on 800 categories of goods imported from China worth $50 billion.
The tariffs angered trading partners, leading to retaliatory tariffs on US goods. Canada imposed matching retaliatory tariffs in July 2018. China accused the US of starting a trade war and on July 6 implemented tariffs equivalent to the $34 billion tariff imposed on it by the US. India planned to recoup trade penalties of $241 million on $1.2 billion worth of Indian steel and aluminum. Just last week, the US announced China and the US had called a ‘truce” for 90 days while they worked through their differences.
Dave set down his keys and picked up his three-year-old daughter Annabel who ran excitedly to the door. He swung her around, thinking of how badly he needed time off with his wife and children this year, thanks to the toll market ups and downs had on his time spent with family.
Even as Dave’s thoughts ran through all this, he heard a ping on his mobile phone. Picking up, he saw an Alert – a top Huawei Chinese Technocrat has been extradited to the US threatening the week old fragile stability of the US-China truce. He sighed, knowing he needed to find an alternate supplier quickly. With the tariffs eliminating so many options, Dave knew he was in a race to secure the best price for his contracts without compromising quality or causing manufacturing disruptions. Setting Annabel down, he ran to the study calling out to his wife that he needed 30 minutes to finish up work.
He sat down and smiled, glad that his decision to adopt an Eka’s app-based Digital Commodity Platform three months ago was already paying off. He now had a tremendous advantage over competing manufacturers because Digital CM’s app-based approach to commodity management provided real-time insight, communication, and collaboration 24 X 7.
With Eka’s Supplier Connect App, Dave had access to all his global suppliers at the touch of an app screen. He logged into the app from his phone and checked availability from his non-Chinese suppliers against his manufacturing requirements for 1Q 2019.
Dave saw both Mexican and Australian suppliers that could meet his needs. He needed to consult with the Risk Manager to understand the overall impact on their exposure, and quickly sent his colleague Gordon a screenshot of the potential contracts.
Gordon had just finished a meeting in Chicago and was packing to leave as he saw the message from Dave. He logged back onto his screen and saw how the increase in price of Chinese steel was already beginning to swing prices upwards of 30%.
Gordon and Dave knew they needed to simulate various options to determine how to source metals while maintaining profits and adhering to hedging and risk policies.
They had many aspects to analyze from Risk, Position, P&L and Simulations on Eka’s Digital CM App Platform. Dave was glad he didn’t have to run through these on spreadsheets and waste precious time. Gordon and Dave talked through many questions:
- How did switching from Chinese to Australian steel impact his hedging and risk strategies?
- What were the credit and operational risks involved with using the new suppliers?
- Is purchasing components more cost effective than purchasing steel?
- What components can be outsourced? How does purchasing components impact risk?
- Can Australian steel replace Chinese steel in the time frame needed without eroding profits?
- What is the impact of a longer supply chain?
- What process would cause the least disruption to production?
After running multiple What-If Scenarios, they narrowed down potential sourcing contracts to potential suppliers in Australia.
Dave logged into Eka’s Supplier Connect App on his phone – hundreds of his company’s suppliers were connected to his sourcing app in real time.
He pinged a supplier via Eka’s Supplier Connect in Australia, noticing they had steel available to cover his three-month contract. Even before he set his phone down, he received a bid on his offer and smiled at how quickly and efficiently his exposure was covered, without the delays inherent in email and phone calls across time zones.
Dave secured the steel he needed at the right price, and in just 30 minutes. His wife Anna called out, “Are you done yet? We need to go to bed early to make our 7.00 AM flight out to Colorado. We are all so excited for our skiing holiday.”
Dave smiled. Thanks to the always-connected Digital Commodity App Platform, he could surf the market waves and ski at the same time. More than any year in the past, he needed a real holiday away from his desk this December.